Inflation is becoming a problem here in the U.S. and with the spillover effects of the war in Ukraine, inflation may become a global affliction too. I am not aware of much comment on the relationship of inflation to capitalism, but it seems to me, as I argue below, that inflation is more of a failure of government than of capitalism itself.
Moral Capitalism and Inflation?
Inflation hurts – and the poor more than the rich. So, why isn’t capitalism put in the dock and blamed for inflation too, as well as for its other failings to provide us with equality of outcomes?
True enough, inflation shows up in markets – prices rise, the value of money sinks. But markets do not and cannot of themselves generate supply or demand. The conditions which allow marker makers to set prices are under the control of buyers and sellers operating independently of one another. And, true enough, sellers can conspire to restrict supply to inflate prices and buyers can boycott what sellers want to sell to force prices down.
Yet, it seems most often to be the case that forces outside markets drive pricing – wars, pandemics, famines, innovations, supply chain imbroglios, government policies – fiscal policy, monetary policy, regulations, public health and safety, care of the environment standards.
In the U.S. today, I sense a growing opinion that government fiscal and monetary policies have caused the present inflation. The harm done to our society by this inflation can’t be blamed on capitalism. Consider the following two charts:
When the Federal Reserve Banks have put cash into the economy to buy financial contracts in an amount at about 35% of annual GDP, there is upward pressure on nominal prices from so much liquidity sloshing around, as the marginal utility of each dollar decreases.
Now, the consequence of inflation on prices is decline in the real value of assets. Inflation destroys wealth, the very opposite of what capitalism is designed to do. This chart shows the decline in real wealth in stocks in the U.S. during the last round of serious inflation in the 1970s:
The Caux Round Table also proposes principles for moral government. Perhaps those principles should be used by politicians and officials to moderate government policies which cause inflation.
The Caux Round Table Principles for Moral Government propose that:
-General welfare contemplates improving the well-being of individual citizens.
-The state shall nurture and support all those social institutions most conducive to the free self-development and self-regard of the individual citizen. Public authority shall seek to avoid or to ameliorate conditions of life and work which deprive the individual citizen of dignity and self-regard or which permit powerful citizens to exploit the weak.
-The state has a custodial responsibility to manage and conserve the material and other resources that sustain the present and future well-being of the community.